We Spent What on Paper Clips?

Open-book management lets every employee look at the company’s accounts.

A few years back, an acquaintance of mine took over a family business from his dad. When I recently asked him what sorts of changes he’s been making since he grabbed the helm, he told me the idea he’s most eager to experiment with is a concept called “open-book management”—a system in which every employee, from the top managers down to the most junior guy on the factory floor, is walked through the detailed financial statements of the company on a regular basis.

“I watched my father run this business for many years,” said my friend, whose 25-employee firm manufactures corrosion-resistant plumbing parts that handle caustic fluids. “My father was always successful, but he had to be pushing all the time. He was herding cats when it came to his workers. He could never be away from the company for even a short while. To me, it seemed like a miserable way to live.”

For some time now, my friend has been reading, studying, and talking to other open-book managers. He even attended a specialized conference focused on open-book ideas as preparation for introducing the technique into his business. “It just makes sense,” he says. “It seems like the only logical way to run a company. It creates a system that empowers everyone at the organization, from the bottom up, to be an entrepreneur.”

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The phrase “open-book management” was coined by the writer John Case in a 1989 story for Inc., the business magazine. But the most visible advocate for the concept—sometimes known as the godfather of open-book—is a man named Jack Stack. Stack bought a troubled engine remanufacturing plant in Missouri in 1983 and soon realized it would fail if he didn't make some radical changes. Case describes the transformation in his book, Open-Book Management:

The only way to survive, Stack decided, was to make sure everyone in the whole plant, all 119 employees, knew exactly how iffy things were. He began distributing the income statements, along with the various operational and budget numbers that made the income move one way or the other. He taught the managers and supervisors how to read the financials. They, in turn, gave an abbreviated course to hourly employees.

Everyone became aware of which departments and processes gained or lost money for the company and how their precise roles contributed to (or detracted from) income. They could see where waste—even small, forgettable kinds of wasteful behavior like frittering away office supplies—hurt the bottom line. Workers didn't need to quietly speculate about how much money was going to the ownership group, since the numbers were right there.

At the same time, Stack introduced bonuses dependent on moving those numbers. There was an employee stock ownership plan, so everyone had a stake. The entire staff was motivated to work in concert to hit goals, as they would all benefit from the successes.

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By 1992, annual revenues at Springfield ReManufacturing Corp. had gone from $16 million to $83 million. The company's value had grown from $100,000 to $25 million. By 2013, the stock had risen from 10 cents a share to $348, and the original hourly workers owned, on average, stock worth more than $400,000.

The entrepreneurial Stack bottled his insight and labeled his philosophy the “Great Game of Business.” The metaphor refers to the notion that every employee can see the scoreboard (meaning the financial statements), they're all on the same team, they all benefit from winning, and the process is fun. Stack continues to give lectures based on his story and holds regular conferences for managers and owners who hope to inject these concepts into their own workplaces. In Springfield alone, where SRC's success was impossible for neighboring organizations to ignore, open-book techniques were adopted by a car dealership, a cleaning service, and even the local police department.

Some owners or managers might be reluctant to share numbers with employees. One concern is that workers might leak information to competitors. But if employees have been sufficiently motivated by equity stakes or bonuses that are entwined with company performance, the last thing they'll want to do is harm the company by aiding a rival. An employee of Square, the privately held San Francisco–based payments company, tells me that over the multiple years that Square has been sharing financial numbers with its employees, there’s never been a single leak—despite operating within the incestuous, cutthroat realm that is the Bay Area technology sector.

The hotel now had people running out, carrying bags, greeting customers, being personable.

Another worry is that sharing numbers might fuel employee resentment over how budgets are distributed. But according to Case, most low-level workers vastly overestimate how much of their company's revenue is profit. When they learn how thin the margins truly are, they develop far more respect for attempts to limit needless expenditures. In situations where layoffs become necessary, opening the books can help workers understand why the company was forced to cut jobs. Case credits open-book management for frequently defusing adversarial relationships between labor unions and management. (Sharing information about individual salaries is still very rare, for obvious reasons. But consider: In the wake of the firing of Jill Abramson, executive editor of the New York Times, there were reports that Abramson had battled ownership over getting fair pay in comparison to her predecessor in the job. Salary transparency could put an end to these kinds of conflicts. Still, most open-book firms choose to reveal payroll outlays in the aggregate.)

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Perhaps the biggest stumbling block isn't merely presenting the numbers, but presenting them in a way that's understandable to all employees. “I still learn new concepts every time I look at our bookkeeping,” says my friend with the industrial plumbing parts company, “and as the president and owner, I expect to have a pretty good handle on it. For an hourly machinist, it might be a challenge. And they might be tempted to say, ‘Why can't I just do my job?’ ”

But just “doing your job” as a mercenary hired hand, with no comprehension or motivation when it comes to how you contribute to the company's bottom line, is exactly what open-book management seeks to eliminate. It thus becomes vital to teach employees some basic accounting and corporate finance concepts, with regular tutorials, so the numbers getting shared will have real weight and meaning. Open-book companies often end up developing their own educational modules as they figure out ways to make financial statements clear to all sorts of different workers.

Along with transparency and explication, the third leg of the open-book stool is making sure everyone has skin in the game. Knowing the numbers and what they represent only gets you so far. Workers must also be incentivized to move those numbers.

Case tells a story about a hotel manager who was mentored by Jack Stack. The hotel was averaging a feeble 67 percent occupancy rate, which meant it was losing money. Stack first advised the manager to share the occupancy number with all employees—maids, bellhops, everyone—every day. Then he had him offer a bonus to every worker if the rate stayed above his goal of 72 percent. The transformation was evident: People weren't just clocking their hours, they were now working together to improve occupancy so that they'd all make more money. And the daily number felt like a scoreboard. “At the end of eighteen months,” Stack told Case, “they were up to 85 percent. The funny thing was, they now had people running out, carrying bags, greeting customers, being personable. For all that time before, what kept the manager from thinking that all the employees could understand that critical number—and could respond to it?”

“People say, ‘It wouldn't work for my business,’ ” says my friend. “But I've talked to people using it successfully at accounting firms, law firms, marketing agencies, and local governments, along with a lot of industrial companies like mine. To me, it's the most logical management system there is.”